Wednesday, June 17, 2009

If I were China...

I know what you've all been thinking... "Hey Mr Snarkoplepsy, if you were China, what you do about the US bond situation?". Funny you should ask...

If you're at all paying attention to the US financial situation, you know that the countries who buy our debt (i.e. lend us money) are very worried that the Fed may inflate the currency (print money), which is great if your the debtor, but sucks if you're the lender.

Of course, the US govt says "Who, us? Why we would never do that! How could you even think such a thing?." All the while implementing financial policies that have *always* led to massive inflation.

If I were China, I would very publicly offer to refinance the existing US debt at a much lower rate, but in Yuan (the Chinese currency), rather than US dollars. If the US govt really believes that the dollar isn't going to inflate, then this is a spectacular deal, which would save us billions or trillions of dollars in interest payments.

If the US won't take such a deal, it's a tacit admission to China and all other countries that the US does indeed intend to inflate it's currency.

8 comments:

Davis Freeberg said...

The Chinese want to keep their currency weak so that they have jobs for their factories. They would be the last ones to upset the advantage that they have (cheap labor). This is a big reason why they bought the US debt to begin with. Personally, I like owing them money because countries have a tendency to avoid wars when they want to get paid back.

Mr. Snarkolepsy said...

Actually, I think that's an argument in favor of my plan. The Chinese want to maintain the relative value of the Dollar to the Yuan as it exists now. If we inflate our currency, they either have to follow us down the rabbit hole to Zimbabwe-like status, or they lose money on their loans, and we won't be able to afford to buy their stuff.

The beauty of my plan (IMNSHO), is that I think it's a win-win for China.

As it stands currently, there's no incentive for the US govt to not inflate the dollar. It sucks for the taxpayer, but not for the politicians.

But if our debt is in a foreign currency, rather than dollars, the incentives work in the reverse direction. Inflating the currency has immediate negative effects (rather than being delayed for months or years, and possibly an election cycle). The govt would have to either maintain or improve the dollar, or pay much more in interest payments.

And if the US govt won't take such a deal, it's a clear signal to all potential US bond-buyers that it's a suckers bet.

Davis Freeberg said...

It is in their interest to maintain the current spread between the dollar and the Yuan, but the problem with converting all of the treasuries to the Yuan is it would make China's currency the primary currency in the world. If all other currencies had to adjust to the new stronger Yuan, we'd see their gap close with inflation or not. I think the other problem that people would have with this is that China has had their own fair share of inflation too. Whether this has been intentional or not probably depends on who you ask, but it'd be a bigger deal then the inflation in the US, if the Yuan was the primary currency.

Mr. Snarkolepsy said...

"the problem with converting all of the treasuries to the Yuan is it would make China's currency the primary currency in the world."

I see your point. But it doesn't have to be an all-or-nothing thing. Refinancing a minor chunk (think stimulus or TARP sized amount) would be sufficient.

allyanne80 said...

China & the US have a symbiotic relationship. If China forces us to pay back our debt, the US couldn't pay back the debt so China would go bankrupt. And well really, both problems are similar. We don't have enough money and China has too much money. So if China spends its money unwisely- say, by building a giant Olympic stadium or building useless factories, the result is the same. If the money were to stabilize at normal rates, then it would not be successful for us to send production there. Also, China doesn't really have to answer to its people.

Davis Freeberg said...

Since we are on the topic of grand theorhetical ideas that will never happen, I'll throw one out as food for thought. What if the US solved their immigration problem by making Mexico a state?

Mexico would get to vote on it of course and we'd probably have to change some of our social programs, but it would secure oil for the US and would help to raise the standard of living in Mexico. It'd never happen just because of the racial issues involved, but if there were any country that was going to join the US, I think they would make the most sense.

she said: said...

Doesn't Mexico think we belong to them? Something about is stealing their land?

As long as we are contemplating things that will never happen - I've never quite understood why Mexicans can't just get a workers visa. Every other country on the planet can pretty much apply for a visa to come work here. Canadians can, but Mexicans can't. Sure you have to get employer sponsorship, but with ICE in full force these days - I think in the end it might gain favor.

Make the penalties stiffer for crossing the border illegally, but make a new visa category for farm workers or whatever. They'd pay taxes and not have to worry about getting deported. They could go home to visit their families legally. Increasing tourism. The government would spend less money trying to chase them out.

After all, despite really high unemployment - I don't see a big push for Americans working the fields. So maybe they were right. Mexicans do the work white people don't want to. Give them a visa and be done with the whole thing.

Mr. Snarkolepsy said...

Interesting idea Davis, but I don't think it would work (even if we assume Mexico would agree).

Mexico would get all the benefits of being a US territory, but we'd get none of the benefits that Mexico potentially has to offer.

(1) it wouldn't secure Oil supplies, b/c the greenies in our govt would just declare the oil supplies off limits, the way they have for much of the US's oil supply (ANWR, Calif coast, florida coast). If the govt wanted us to have cheaper oil, they can do that now. They don't want to.

(2) Mexico is poor b/c of it's govt and it's culture/attitudes toward it's govt, i.e. corruption is tolerated, and seen as a normal part of doing business.

Some parts of the US hold the same cultural attitudes toward govt, and those areas tend to be really poor as well (e.g. New Orleans, Detroit).

Making Mexico a state wouldn't change the attitudes of the Mexican people, and the current office holders on the receiving end of the corruption are not just going to voluntarily give that up.

----

I think the reunification of Germany is a lesson here -- prior to the fall of the Berlin wall, West Germany is capitalist, and one of the richest nations in Europe, while East Germany is socialist, and one of the poorest.

When the Berlin wall fell, I (and I think most people) expected that the newly free E Germans would adopt the (obviously more successful) policies of W. Germany.

But that's not what happenned.
Instead what happenned was an averaging of the two. Germany is now more socialist than W Germany was, but less so than E Germany was. And it's now much poorer than W Germany was.

The E Germans wanted to share in the wealth that capitalism produced, but didn't want to adopt it's methods. And they now made up a large voting block. So they voted themselves more redistribution of W German wealth, and more socialist policies.

Adopting Mexico would have a similar result.